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Written by: Kaitlin Walsh
While those of us who work in financial services know all the theory around personal financial management, few of us actually put that theory into practice.
That can lead to scary results!
With Halloween just around the corner, there’s no better time to share some tips on creating a clear roadmap to get your financial house in order. Here are some key tips from a few experts in the field.
Plan ahead
Unless you win the lottery, securing your financial future isn’t a question of luck, it’s a matter of good planning and management. The Financial Planning Association of Australia (FPA) highlights the importance of starting a financial plan and establishing the right financial habits early on. According to the FPA, although most people don’t typically seek out a financial planner until they’re 50 or over, it’s younger people who are most in need of sound financial advice. After all, you’ll get the best results if you start actively managing your debt and saving early on in life. Planners usually don't charge for the first consultation and, sometimes, one visit is enough to get clients pointed in the right direction.
Plan to avoid a retirement shortfall
The RaboDirect Financial Health Barometer shows that more than one third of Australians dream of early retirement, while workers are becoming increasingly confident that their superannuation will adequately fund their retirement. While this may sound promising, some research has cast doubt on just how realistic this may be given the $4.21 trillion gap in the nation’s retirement funding goals, an amount that exceeds the GDP of countries like the United Kingdom, Germany and India.
In fact, the average working Australian faces a shortfall of $281,000.
So what can be done to ensure that we avoid a retirement shortfall? RaboDirect’s Group Executive, Greg McAweeney says, “There’s no magic formula for planning a comfortable retirement and property, savings and voluntary contributions may all form part of the picture. The most important thing we should all be doing is taking simple steps to make more of our money. Things like paying down your biggest debt first, regularly putting aside money in a true savings account and setting a budget, can make a significant difference to anyone’s financial situation.”
Plan for the long haul
Today’s life expectancy figures mean we can reasonably expect to live in retirement for several decades. The consequences in terms of funding these lengthy retirements — especially given our ageing population — are profound. Successive governments have grappled with ways to deal with this — from Paul Keating’s introduction of our compulsory superannuation system through to more recent moves to raise the retirement age to 67; and now perhaps 70.
In short, you need to make sure your retirement dollars will last the distance. How can you achieve this? Start early and make wise investment decisions. One fund manager which has made longevity – or “long termism” its mantra is Hyperion Asset Management . Hyperion MD, Tim Samway, has strong views on features of equity investments that will help last the distance. According to Samway and the team at Hyperion, if you want the kind of investment returns that will deliver for the duration of a modern day retirement, then you need to look first and foremost for earnings growth.
“When you’re looking at 30-odd years of retirement, yield alone is just not going to get you there,” says Samway. “Even high dividend yield stocks like banks are not going to cut it. It’s earnings growth that will carry you through. That means stocks from companies that have the ability to grow organically over the long term, with earnings growth to match."
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Planning for the worst is the best way to avoid it
You will have heard the clichés about protecting your best assets — your home, your car and so on — and then the inevitable segue into the need for life insurance. The reality is that clichés are clichés because they happen. Over and over and over again. And if something happens to you, and your ability to earn an income, and you haven’t taken the right steps to protect yourself, you might be in serious trouble.
According to specialist life insurer TAL , the Australian Institute of Health and Welfare has estimated that as many as three in four Aussies are diagnosed with a serious illness in their working lives, and over a two-year period alone, an estimated 50,000 people were injured in road accidents. Plus, around 30 percent of the workforce is likely to spend time off work during their working career due to injury or illness. Your employer may cover this under paid medical leave but the legal requirement is capped at just 10 days. After that, depending on your employer’s mercy, you may find yourself on your own.
The message here? Insure your income and your ability to execute your financial and retirement plan. Otherwise the evidence says you’re leaving it to chance. That is a fact. Get the right advice about the type of insurance that best suits your plans, and how you should pay for it (in super, out of super? A bit of both?). Because you do have options – it’s a matter of finding out what they are and (again, sensing a pattern?) getting started right away.
So, in conclusion, don’t let dealing with your finances spook you – with some simple planning now you can avoid any finance nightmares in the future!